Will Apple add more networks next year?

Apple is unlikely to continue the strategy of the exclusive distribution deal in the UK. We have seen that Apple is evolving its global distribution strategy, and has moved away from the exclusivity model in a number of markets already.

The UK is actually a unique case in the way the iPhone is sold. Many other European markets where the handset is available have more than one operator offering it. For example in Italy, the iPhone is sold by Vodafone and Telecom Italia Mobile.

Initial exclusivityInitially it made sense for Apple to have a period of exclusivity with one operator, because it gave the manufacturer control over how the product was introduced to the market and it did succeed in making an impact with it.

The ‘die hard’ Apple fans got hold of the device during the first wave when the 2G version of the handset was introduced. And when the 3G phone was launched with a subsidy from O2 and its price dropped to the same level as other high-end handsets like the Nokia N95, most people who wanted an iPhone got their hands on one.

The benefits of the exclusive model have diminished. Now that the product is more established it makes more sense for Apple to broaden distribution in the UK.

Apple’s decision to offer the first iPhone through a limited number of mobile network operators while shunning the traditional model limited its reach. The change in its approach for its second device, the 3G iPhone, saw Apple avoiding further exclusive agreements and expanding its global distribution footprint in some European markets.

The exclusive agreement got Apple to a certain point but the manufacturer is likely to become more consistent with the way business is done in the mobile sector.

We don’t know the details of the contract between O2 and Apple and it is impossible to guess how long the exclusivity period that they have agreed on is, but once the exclusivity period is over, unless O2 can prove that there is a benefit for Apple to continue allowing it to offer the handset exclusively, you’ll see it with multiple network operators.

Extending the offering of the iPhone to other UK networks should not be a problem, as Apple already has contracts in place with a number of operators, including Vodafone and Orange in other territories. Extending the distribution to the other networks would lead to the kind of competition that you see on any device.

iPhone valueWhether the price of the handset falls further as a result of wider distribution depends on what the other networks want to do with it. Apple is in the hardware business and it will be happy as long as it gets the price that it asks for the handset, although there is certain value to the phone that Apple will want to keep.

Apple is now offering the phone on prepay, which shows that it is really trying to drive volume.

Ultimately all the people that want the iPhone in its current format have one already, apart from those people that did not want to change networks. That’s why we think that Apple will diversify the range of mobile phones it offers in a similar way to what it has done with iPods, offering two product categories: the iPhone Nano and the iPhone Pro.

We expect the iPhone Nano to be a smaller, less expensive version of the iPhone, which will help Apple compete with the burgeoning number of inexpensive touch-screen devices. It will be critical in making the iPhone accessible to a new tier of the market.

The Pro will be a variant targeted at users looking for the full QWERTY keyboard. Apple has made no secret of its desire to address the enterprise market, comparing itself to RIM in the third quarter earnings announcement.